Question 1

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

Accepted Answer

A) True 
 B)False

Question 2

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Accepted Answer

A)  remain unchanged
B)  rise by $300
C)  fall by $300
D)  rise by $200
E)  fall by $200F) A) and B)
G) A) and E)

Question 3

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

Accepted Answer

A) True 
 B)False

Question 4

The difference between the classical approach and the Keynesian approach to fiscal policy is

Accepted Answer

A)  Keynesians believe that natural forces in the economy would tend toward full employment
B)  Keynesians believe that natural forces in the economy would not tend toward full employment, but they were distrustful of government's ability to stimulate the economy
C)  classical economists believe that the economy would not achieve its potential GDP but that any action of the government would make matters worse
D)  Keynesians believe that it may be necessary that government increase aggregate demand so as to stimulate output and employment, if the economy is to achieve its potential output
E)  both the classical economists and Keynesians were equally distrustful of government intervention in the economyF) A) and B)
G) D) and E)

Question 5

If government purchases and autonomous net taxes increase by the same amount, the equilibrium level of real GDP will be unchanged.

Accepted Answer

A) True 
 B)False

Question 6

Exhibit 12-1
 
-Given the information in Exhibit 12-1, the government spending multiplier is equal to

Accepted Answer

A)  2
B)  3
C)  4
D)  5
E)  6F) C) and D)
G) A) and D)

Question 7

If equilibrium real GDP demanded rises from $4 trillion to $6 trillion when government purchases increase by $1 trillion, how large is the marginal propensity to consume?

Accepted Answer

A)  0.8
B)  0.4
C)  0.5
D)  0.2
E)  2F) C) and D)
G) B) and E)

Question 8

Exhibit 12-3
 
-In an economy characterized by Exhibit 12-3, there is a recessionary gap.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 12-2
 
-In an economy characterized by the aggregate expenditure line in Exhibit 12-2, if government spending was independent of the level of real GDP what would the government spending multiplier be equal to?

Accepted Answer

A)  0
B)  1
C)  2
D)  3
E)  4F) A) and D)
G) A) and C)

Question 10

If policy makers estimate the natural rate of unemployment incorrectly,

Accepted Answer

A)  their policies will cause deflation in the long run
B)  their policies will cause even more unemployment in the long run
C)  the economy will stay below its potential GDP level in the long run
D)  the economy will tend toward that level of unemployment the policy makers believe is correct
E)  policies that appear to be successful in the short run will lead to further economic problemsF) C) and D)
G) All of the above

Question 11

A decrease in net taxes

Accepted Answer

A)  raises aggregate expenditure by raising disposable income, thereby increasing consumption
B)  raises aggregate expenditure by raising disposable income, thereby decreasing consumption
C)  lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption
D)  lowers aggregate expenditure by lowering disposable income, thereby increasing consumption
E)  has no effect on aggregate expenditureF) A) and B)
G) B) and D)

Question 12

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

Accepted Answer

A)  the higher taxes lead workers to seek out a second job
B)  the higher taxes cause workers to work less
C)  the government purchases goods with the additional revenue
D)  the government uses the additional revenue to retire some of the federal debt
E)  the higher taxes cause people to save lessF) B) and D)
G) All of the above

Question 13

Which of the following is true of automatic stabilizers?

Accepted Answer

A)  They require ongoing decisions about government purchases and taxation to promote full employment and price stability.
B)  They include the unemployment compensation program.
C)  They tend to stimulate aggregate demand when the economy is experiencing an expansionary gap.
D)  They include tax cuts passed by Congress to ease a current recession in an economy that has a proportional income tax.
E)  They include government purchases of goods and services requiring Congressional approval.F) C) and D)
G) A) and D)

Question 14

Which of the following might be considered the most contractionary set of fiscal policies?

Accepted Answer

A)  increase in government purchases, increase in taxes, and decrease in transfer payments
B)  decrease in government purchases, increase in taxes, and decrease in transfer payments
C)  increase in government purchases, decrease in taxes, and increase in transfer payments
D)  increase in government purchases, increase in taxes, and increase in transfer payments
E)  decrease in government purchases, decrease in taxes, and decrease in transfer paymentsF) A) and C)
G) A) and B)

Question 15

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals

Accepted Answer

A)  1
B)  10
C)  3
D)  0
E)  an indeterminate valueF) All of the above
G) B) and D)

Question 16

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could __________ autonomous net taxes by __________.

Accepted Answer

A)  increase; $100 billion
B)  decrease; $100 billion
C)  decrease; $100 billion × MPC/(1 - MP
C)  
D)  increase; $100 billion × MPC/(1 - MP
C)  
E)  decrease; $100 billion × (1 - MP
C)  /MPCF) C) and D)
G) A) and E)

Question 17

Classical economists believed that if investment were greater than saving, the interest rate would __________, causing saving to __________ and investment to __________ until the two were equal.

Accepted Answer

A)  rise; decrease; increase
B)  fall; decrease; increase
C)  fall; increase; decrease
D)  rise; increase; decrease
E)  fall; increase; increaseF) A) and B)
G) B) and C)

Question 18

The Golden Age of fiscal policy was during

Accepted Answer

A)  the 1920s
B)  World War II
C)  the Eisenhower years
D)  the 1960s
E)  the Reagan administrationF) A) and C)
G) A) and B)

Question 19

Discretionary fiscal policy is policy that

Accepted Answer

A)  is developed in secret
B)  applies to some states but not others
C)  applies to some industries but not others
D)  works automatically without public announcement or plan
E)  is an intentional change in taxation or government spendingF) B) and E)
G) A) and B)

Question 20

Suppose both autonomous taxes and transfer payments increase by $50 billion. If the MPC = 0.75, by how much does equilibrium real GDP demanded change?

Accepted Answer

A)  $0
B)  $50 billion
C)  -$50 billion
D)  $200 billion
E)  -$200 billionF) B) and C)
G) None of the above

Exam 13: Fiscal Policy

The Golden Age of fiscal policy was during

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Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

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Exhibit 12-1 -Given the information in Exhibit 12-1, the government spending multiplier is equal to

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Which of the following is true of automatic stabilizers?

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Suppose both autonomous taxes and transfer payments increase by $50 billion. If the MPC = 0.75, by how much does equilibrium real GDP demanded change?

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Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

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If government purchases and autonomous net taxes increase by the same amount, the equilibrium level of real GDP will be unchanged.

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If equilibrium real GDP demanded rises from $4 trillion to $6 trillion when government purchases increase by $1 trillion, how large is the marginal propensity to consume?

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Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals

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A decrease in net taxes

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Discretionary fiscal policy is policy that

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Exhibit 12-3 -In an economy characterized by Exhibit 12-3, there is a recessionary gap.

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The difference between the classical approach and the Keynesian approach to fiscal policy is

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Classical economists believed that if investment were greater than saving, the interest rate would __________, causing saving to __________ and investment to __________ until the two were equal.

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A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

Correct AnswerverifiedShow Answer

If policy makers estimate the natural rate of unemployment incorrectly,

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If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could __________ autonomous net taxes by __________.

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There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

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Which of the following might be considered the most contractionary set of fiscal policies?

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Exhibit 12-2 -In an economy characterized by the aggregate expenditure line in Exhibit 12-2, if government spending was independent of the level of real GDP what would the government spending multiplier be equal to?

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Classical economists believed that if investment were greater than saving, the interest rate would , causing saving to and investment to __ until the two were equal.

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If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could autonomous net taxes by .

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